Tuesday, January 12, 2016

Don Boudreaux reminds us that lots of voters in both parties are "utterly ignorant of the ways that economies and governments work ... [and] in equal parts mindless, bigoted, and uncivilized. They are, in short, dupes for power-mad despots-in-waiting."

"The Federal Reserve’s most important tool for setting interest rates absorbed a record $475bn of money from financial institutions in its last monetary operation of 2015, in another sign that one of the central bank’s main methods of draining liquidity from the financial system is working.

The New York Fed said that the US central bank had awarded $474.59bn in one-day fixed-rate reverse repurchase agreements to 109 counterparties in an auction on Thursday, more than a third higher than the previous record set at the end of the second quarter in 2014.

The agreements allow qualified financial groups — including traditional banks and money market funds — to park cash at the Fed overnight in exchange for Treasury securities and 0.25 per cent interest.

Analysts and economists have characterised the reverse repo facility, which controls the lower bound of the Fed’s target rate, as crucial to its ability to set short-term rates, and as among the central bank’s most potent tools.

Earlier this month the Federal Reserve pulled off a historic move, lifting its benchmark rate for the first time in nearly a decade from a range between 0 and 25 basis points to 25-50 basis points."

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A half-trillion in reverse repos? Is the Fed in the business of paying IOER to banks...and then artificially propping up short-term rates?

Great post!!!I am Spanish and I live in Spain, not the US, but I can assure you the these simpleton voters from the right wing and the left wing parties are the same all throughout Europe as well. You can listen to these same mistakenly ideas when elections come closer, because politicians feel they will attract more voters when you touch what their voters feel inside. It doesn't matter if these proposals are anti economical and will affect negatively to the Economy. Politicians are happy if they think they attract more voters.They only think in themselves and their seats....Anyway, you are lucky not to have in the US that extremist left wing parties we have in Europe, so...Good luck with your elections!!!

and yet we continue to vote them in. any wonder why DT is popular? he's "different"! the bottom line is no truly qualified person would ever run for president. who would voluntarily put themselves through that gauntlet?

China is gorging on dirt cheap commodities of all kinds -- moreover, China is making real progress toward reducing capital flight of the Yuan -- finally, China is reducing is dollar reserves significantly -- the only losers are Chinese citizens that do not matter in the least to Chinese elites -- overall, the Chinese are winning in the commodities and capital markets, at least in the eyes of Chinese elites -- as for the US, I see the stock market is holding its own, and American consumers will eventually benefit from cheaper commodities, especially petroleum products -- my guess is that commodities will drop much lower, perhaps $20 oil, $700 gold, and $10 silver, while stocks stagnate at current levels -- oh, and rents are up (I know this for a fact)!

Re reverse repos. The Fed is doing exactly what it said it would. It is effectively allowing non-bank institutional investors to access the same IOER that major banks get on their holdings of excess reserves. This puts a floor on short-term interest rates in general.

To Benjamin: The answer to your two questions - is the Fed in the biz of paying IOER and then artificially propping up rates - is YES! That's precisely what they're doing as per their stated policy. And it's also why we're experiencing the (now obvious) effects of deflation.

The question is why the Fed is doing this. And when will it be forced to reverse course? I wish I knew...

Hope of reform continues to fade as the White House today threatened a tsunami of Executive Orders while Paul Ryan applauded. The PUBs spent their rebuttal after the SOTU address last night attacking one of their own, instead of attacking harmful Obama policies. Written by Ryan himself.

And then we found out this mornung that in their Spanish language version of their rebuttal, they actually promised amnesty, unbeknownst to viewers of the main broadcast.

Market gave up its short rally and plummeted another 350 points. Markets continue to reprice as the hope of a regulatory and fiscal Reformation disappears. Marxists cheering. All seemingly unnoticed by financial experts.

Hope of reform continues to fade as the White House today threatened a tsunami of Executive Orders while Paul Ryan applauded. The PUBs spent their rebuttal after the SOTU address last night attacking one of their own, instead of attacking harmful Obama policies. Written by Ryan himself.

And then we found out this mornung that in their Spanish language version of their rebuttal, they actually promised amnesty, unbeknownst to viewers of the main broadcast.

Market gave up its short rally and plummeted another 350 points. Markets continue to reprice as the hope of a regulatory and fiscal Reformation disappears. Marxists cheering. All seemingly unnoticed by financial experts.

Johnny Bee: Thanks for bringing that to my attention. I quickly googled the issue and found a Huffington Post article that describes what you report (i.e., that a Spanish language version of the rebuttal added new language regarding immigration). Then I realized that this all happened a year ago, in the rebuttal to Obama's State of the Union 2015. It's very confusing, since today's date shows up on the top of the page, but the dateline of the article is Jan 21 2015, and it references the rebuttal given by Joni Ernst.

Matt and Scott: well, I guess we can end talk about "financial repression." It is now official: The Fed is artificially raising interest rates, and draining money out the banks in half-trillion dollar dollops!

Perhaps we should not be surprised. Every regulatory agency eventually succumbs to regulatory capture by the very industry it purports to regulate.

Of course the gold standard would be better. It would be the best, in fact. But it'll never happen. The power to create too much or too little money is the most awesome power on earth. My question for the moment: Why is the Fed making such an egregious "mistake"? What's the agenda, especially in an election year. I refuse to believe they are this stupid. Must be something else.

I don't think it's possible to say that the disruptions we are seeing in today's markets are the result of a Fed "mistake." The Fed has not "tightened" monetary conditions at all. There are still trillions of dollars of excess reserves in the banking system. Liquidity is abundant, as evidence by very low swap spreads and generally low high quality credit spreads. The yield curve is without question positively sloped. The dollar is not excessively strong, only moderately above average. Real yields—arguably the best measure of whether money is in short supply or not—are still very low. (Real yields were very high in the late 1990s when the Fed was demonstrably tight, inflation was very low, and commodity prices were a fraction of what they are today.)

I think the Fed is simply responding to the fact that the U.S. economy has been growing steadily at a rather modest pace for a number of years. If money has been "easy" it hasn't helped much if at all. But the banking system has tons of unused lending capacity and interest rates have been very low for a long time. Why not take a baby step to raise rates, in order to get back to something that might be considered more normal?

Benjamin: the Fed is most assuredly not "draining money out of the banks in half-trillion dollops." The Fed is allowing non-major banks to lend to it in a fashion similar to what the major banks do when they accumulate excess reserves. They are actually doing the non-major banks and financial institutions a favor, since they can mow earn more on their money with the Fed than they can by lending to the private sector. This will create a floor for all lending, thus boosting banks' income.

Yes, the same thing happened last night...in spades. Here is a link to Nikki Haley's speech vs the Spanish version given at the same time. I don't speak Spanish, so I'm taking the word of this translation. This link has translations and the 2 videos. I am losing confidence in my Party in many ways. Are they being honest with one group and lying to another? Which group is getting the truth?

Of course it IS all about oil and China these days, but if the US wasn't hurtling toward socialism at such a purposeful and rapid pace, I do not believe that things like oil and China would rattle markets to this degree. Markets are now puking back to us just what has been puked to them.

If our government were returning toward its Constitutional bounds, and our healthcare had moved toward free market operation, and entitlements had just been reformed to become a shrinking percent of our spending, and oppressive poorly thought-out regulations were being peeled away, and our borders were secure so we controlled immigration by policy, rather than by chaos, then risk aversion would not be off the charts, and interest rates would not be drifting toward zero. China would not matter very much in such a rational environment, since they are only 1% of our GDP. And 99 cent gasoline would be considered a good thing on balance, because bad loans could not snowball and threaten our entire system and Middle East stability.

But in an environment of methodical destruction of our Constitutional protections, EVERY bad economic thing starts to matter more, because any of them can suddenly bust through our increasingly precarious foundation and bring down the system. We can all disagree about how much these specific economic factors should matter to prosperity, but I believe markets are starting to add a risk premium to account for our loss of Constitutional protections. Swap spreads are perhaps not measuring the type of risk we face. Negative swaps seem strange to me.

Our amazing system of government and existence thrives through freedom and the competition of ideas, not compromise with unsustainable policies which destroy Liberty and prosperity. Congressional leadership has signaled that the enemies, both foreign & domestic, who have infested our government are no longer being repelled, and We The People are losing our freedom to unConstitutional Bills which establish unretractable spending, and loss of personal and national sovereignty. "Pushing back" has been the hallmark of this entire bull market. It was the underpinning of the prosperity gained FOR ALL Americans from the Reagan Revolution.

When reform-minded PUBs are squashed and the Party leadership embraces the destructive policies of the Left, the underpinning of true Hope starts to dissipate. These are not Reagan Republicans. Markets are repricing to account for this. This is worse than China and Oil, because it means that our ability to deal with a routine crisis begins to diminish. I have made money off others' risk aversion for years, but that's because We The People were always pushing back. I'm not sure how that happens as effectively when our advocates join the other side. The US isn't going away, it's just changing to a populace that is government dependent, and to a system where Communistic cronyism will thrive more than free enterprise. Fewer and fewer winners. 10% corrections suddenly become 20% corrections.

Ben Jamin, excellent first post. I concur with your opinionof The Donald.

I do not think much of the Professor nor his website. Yes, he isright that there are problems on both sides of the "aisle" neverthelessby far the worst comings from the growing power of the Socshevikes.

To answer your previous question, I would support a return toa Au standard, knowing full well it would not provide solutions of all issues but would perhaps place some restraints on the unlimited creditspending CONgress.

Dr McKibbin, when your Red Chinese friends take large comods positionsas they have done so often in the past, I suggest for investors to wait for the appropriate time and short the commodity.

They are always engaged in Peak Pricing schemes, leading to a declinein the underlying asset.

Capital flight is taking place, because their central planning has finally run out of room. It is going to be extremely more challenging to advance the economy, in light of corruption and the controllingCommunist Party.

Counterfeiting (blinking - pasting a visual examination) and stealingtrade secrets are a large growth industry for this nation; consideringthe lack of research and development.

Their construction sector is also much too large of a component of theireconomy which has lead to economic distortions.

I cast myself as a conservative. Immigration needs to be better managed yes. Starting with reasonable quotas for the guest workers we need, and then better enforcement against employers. But that doesn't generate as much support as fear mongering for politicians. Would be much better if conservatives would focus on tax reform, viable health care alternatives, and better social safety nets.

Not to dispute your general theme - you just provided an opening on immigration.

Most conservatives believe we should control immigration through policy, rather than chaos. I don't believe anybody knows how many illegals sneak in. Nor do they know if the trend is rising or falling. The "facts" on illegal immigration are lacking. We are going to need A LOT of new productive immigrants to drive our economy and fund our transfer payments.

Most conservatives believe we should know the identities of individuals are that enter our country. A sovereign nation should decide who comes in, and who doesn't. We should be allowing those who are a benefit to our society, not criminals and terrorists and freeloaders. Most conservatives are just fine with punishing employers for hiring illegals. Most conservatives believe that the combination of Open Borders with a Welfare State are disastrous. Most conservatives want our Dept of Agriculture radio ads in Mexico City to stop advertising how to obtain food stamps upon arrival.

We have laws on the books already to build better physical border structures, to patrol the border, and to punish employers for circumventing hiring laws. Those laws are being selectively enforced, if at all. This is frustrating and unacceptable to most conservatives. Most conservatives are tired of crony Communism where corporations pay politicians to ignore existing laws.

Nobody knows how many terrorists enter in our present system. This is an insane policy choice, particularly since radical Islamic groups have declared war on our country, and are encouraging their members to sneak in. Some call immigration talk fear mongering. Others call it common sense reforms. Lots of people are pining for more common sense these days, and are tired of waiting for the guys in charge to demonstrate any.

Gold at $300 and silver at $5 would be a good time to jump into precious metals -- in the mean time, I'm happy with dividend and rent-earning equities -- I am buying some metals on the downhill slide, but have my stash of cash on the side ready to jump into whatever becomes really cheap this year -- the only thing better than $300 gold and $5 silver would be a 5,000 DJIA -- I'm ready!